Texas Supreme Court throws industry lifeline


Editor’s note: This article appears in the April 2021 edition of DS News magazine, available here.

In a huge victory for lenders and managers, on January 29, 2021, the Texas Supreme Court confirmed that voiding a lender’s lien due to the expiration of the statute of limitations did not prevent the lender from ‘exclude a pre-existing privilege. under the doctrine of equitable subrogation. [PNC Mortg. v. Howard, ___ ‎S.W.3d ___, 2021 WL 297579, at *1 (Tex. 2021) (per curiam).] In accordance with their logic in Federal Home Loan Mortgage Corporation v. Zepeda, 601 SW3d 763 (Tex. 2020), this ruling further strengthens the power of the defense of equitable subrogation and solidifies this alternative to lender’s counsel when faced with claims of potentially unenforceable lien.

The Howards bought a house in 2003 with two mortgages. Two years later, the Howards refinanced those mortgages with the Bank of Indiana. Using primarily the Bank of Indiana loan proceeds, the Howards paid off the two existing mortgages on their property. The Bank of Indiana subsequently assigned the note and trust deed to the National City Mortgage Company, a subsidiary of the National City Bank. The National City Bank then merged with PNC Mortgage.

In 2008, the Howards stopped making payments on the ticket. In January 2009, the National City Bank notified borrowers of their default and of its intention to accelerate the loan if they do not remedy it. Months later, the National City Bank sent out debt acceleration notices. The Howards challenged the foreclosure on the grounds that the original lender no longer held the mortgage and added PNC as a defendant. PNC counterclaim, requesting a foreclosure of his lien. Concerned that the statute of limitations had already elapsed, counsel for the PNC sought a judgment declaring its right to exclude the privileges on purchase money by equitable subrogation in the alternative. The trial court ruled that PNC’s lien and note were inapplicable, and it ruled that PNC is not taking any action against its claims against the Howships.

PNC appealed. It is Pertinent To note here this The PNC argued that the Howards had used the proceeds of the PNC refinancing loan to pay off existing mortgages and, therefore,, PNC hare an equitable lien against property. The court of appeal ruled that, to the extent that PNC held subrogated privileges equitably, those privileges became inapplicable when PNC waived its own privilege by failing to exclude within the required statute of limitations.

Barely a few months after the opinion of the court of appeal, the lender Zepeda the case appealed to the United States Court of Appeals for the Fifth Circuit, which in turn certified the following question to the Texas Supreme Court: “Is a lender entitled to a fair subrogation?” , where he failed to correct a repairable constitutional defect in the Texas Constitution § 50 loan documents? ” [Zepeda v. Fed. Home Loan Mortg. Corp., 935 F.3d 296, 301 (5th Cir. 2019)]. The Supreme Court said yes. [Fed. Home Loan Mortg. Corp. v. Zepeda, 601 S.W.3d 763, 764 (Tex. 2020). The court further elaborated that equitable subrogation “allows a lender who discharges a valid lien on the property to step into the prior lienholder’s shoes and assume that lienholder’s security interest in the property, even though the lender cannot foreclose on its own lien.” [Zepeda at 766.]

As such, the PNC attorney petitioned the Texas Supreme Court for a review arguing only Zepeda reversal required; the Texas Supreme Court agreed.

the vsourt “observed that equitable subrogation rights become fixed at the time the proceeds of a subsequent loan are used to discharge a prior lien. “ He added that “the negligence of a lender in preserving its rights under its own lien does not deprive the lender of its equity rights to assert a prior lien which has been released using the proceeds of the loan. ulterior”. [Howard, 2021 WL 297579, at *3]. Apply Zepeda given the facts of the case before it, the Texas Supreme Court ruled that the PNC’s failure to seize in a timely manner under its trust deed did not preclude its rights of subrogation and that subrogation allowed a lender to assert its rights under a lien satisfied by its loan when the lender’s lien is invalid.

Without hearing argument, Texas Supreme Court allowed PNC’s petition for review and reversed this part of the judgment of the court of appeal, declaring PNC’s equitable subrogation rights inapplicable on the basis of a decision that PNC was dilatory in the application of its own privilege. He also referred to the Court of Appeal for further proceedings in accordance with this opinion and to Zepeda.

Undeniably a victory for lenders and managers with assets located in Lone Star State, this in no way allows lenders to “get out of the woods”.“They must actively engage a lawyer and continue to monitor their privileges to completely circumvent the potential issue of limitation to avoid having to assert their equitable rights of subrogation.

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